Jimmy: “Pssst. There’s an elephant in the living room, but we’re pretending it’s not really there and it’s not really an elephant.”

Sammy: “But it’s enormous and it smells!”

Jimmy: “Just ignore it. Maybe it will go away.”

Sounds silly, doesn’t it? How could anyone ignore an elephant in the living room?

The pachyderm metaphor describes issues we don’t want to confront, that cause conflict or that we believe are best left alone because no solution is readily apparent.

For many producers, succession planning is an example of this “avoidance” phenomenon, just as estate or financial planning can be for the average individual. According to LIMRA research, only a small percentage of insurance producers have a formal succession plan in place, even though the average age of producers is around 58.

This may explain, at least partially, why only about one-third of family businesses continue into the second generation and less than 15% survive into the third generation.

While the research on this attrition is sound, myths dominate its explanation. Whether a particular factor in a “failed business handoff” is a myth or a truth often can be attributed to one driver: personality variables and how they impact family dynamics and key decisions. And yet, few insurance entrepreneurs proactively address this “soft” issue.

An overused explanation for the falloff is that second-generation successors are less ambitious and less hungry than the founder. Another is that as families grow larger, family members tend to separate because of differing interests.

A third explanation is that family members distance themselves from the business because of the emotional environment in which individuals struggle to distinguish between a family and a business issue.

All family- and non-family-owned businesses face a common challenge: people issues. But because people dynamics are often difficult to grasp and manage, principals tend to focus on the five logical and tangible steps of the process:

1. Defining and organizing the business for sale and/or succession;

2. Setting financial objectives;

3. Finding potential buyers and/or successors;

4. Valuing the business; and

5. Planning for the transition.

While the above steps are crucial elements to any succession planning, the “thin red line” that runs through all of them is the interpersonal dynamic that is destined to dominate the process if it is not addressed early, often and throughout.

Seven factors drive both positive and negative interactions in any business: 1. competitiveness; 2. confidence; 3. energy; 4. extroversion/introversion; 5. intellectual criticism; 6. anxiety; and 7. distractibility.

How two or more individuals compare on each of the “big seven” tends to determine how they approach the planning process and their interactions with others during the process. If they are homogenous on a particular factor, they may view the world around them in a similar manner; and, therefore, they understand each other’s approach and perspective more easily.

If, however, they differ significantly on one or more of the factors, they may have difficulty grasping why the other person or persons behave the way they do. But what if two or more stakeholders are highly competitive?

Are they likely to have authority conflicts or trouble delegating to others? Will their high drive to excel blind them to what is best for the enterprise? And will this become a barrier to real and productive decision-making?

Competitiveness is just one of the seven interpersonal factors, but you can see how the other factors, alone or combined, can be an underlying element in the succession planning process.

Thus, while formal business planning steps are key to a successful succession plan, they are only part of the story. To ignore one of the five steps is to increase the likelihood of a failed succession.

To ignore the interpersonal dynamics within the key stakeholder group is to pretend the elephant is not there. And an elephant in your living room, sooner or later, needs to be addressed.

Cam Anderson, MBA, CMC, CTC, is president and CEO of MBA Consulting Inc. and can be contacted at cameron.anderson@rogers.com.

To ignore the interpersonal dynamics within the key stakeholder group is to pretend the elephant is not there